I get approached by people selling all kinds of different investments all the time, mostly hoping I will publicize it to blog and/or newsletter readers. Some deals are attractive, some are not. Most I simply don't have the time or expertise to evaluate properly. Many are quite clearly what I call “Doctor Deals,” i.e. deals that can only be sold to doctors, because they're the only ones with the money and the lack of financial sense to buy them. One of these is a company called Equity Estates that emailed me a few months back. I asked a few follow-up questions and asked for some more information. As (some of it) came back, it became pretty clear to me that this a fairly classic “Doctor Deal.” I'm not going to pretend I've done anywhere near all the due diligence an “investment” like this requires, but I've certainly done enough to know I'm not interested!
How It Works
This particular investment was for the Equity Estates Luxury Residence Fund II. It was pitched as a smart alternative for international vacations that also provides a sound investment. Yes, that's right, a luxury time share program.
“Of course, ownership in Equity Estates has its privileges – everything is taken care of for you. And this is a major selling point for investors who want to own, but not worry about the hassle and upkeep that comes with vacation home ownership. Property management and maintenance are included, and accommodations are luxurious with five-star concierge services.”
Not only do you get to enjoy 70+, $2-4M properties located in 30 countries, but after a period of 9 years or so, the properties are liquidated and you get to profit. The brochures are full of beautiful pictures of beautiful places you get to go to as an owner. What's not to like? Well, for one I don't like “combination” products, such as combining insurance and investing. But if mixing insurance and investing gives you the worst of both worlds, imagine what combining investing and vacation gives you?
The Downsides
Well, as you might imagine, it didn't take much digging to find the downsides. For example, the $217,500 minimum investment. Now, I'm a fairly well-paid physician and based on the surveys I've seen, I have an income and net worth well above the average physician. But this represents the equivalent of a year's gross income for the average physician. Even for a physician with a large portfolio of $1-2M, $218K represents 10-20% of it. You've got to have a really large portfolio to be able to diversify this sort of a minimum investment.
Another downside is the fees. For example, at the standard “membership level” (30 nights) you pay $19,500 a year. Yes, that's right. You own the place by virtue of paying $217,500 to get in, but then you pay ANOTHER $19,500 each year (at best $650 a night) in order to use your place. Now, I don't know about you, but for $650 a night I can have a heck of a hotel room, and if I decide I only want to use the hotel room for 24 days, I get to save four grand rather than being committed to the entire $19,500 a year. Now, maybe that is a heck of a deal to rent these primo properties, I don't know, but I kind of doubt it. We rented a very nice home on a golf course in Vegas a couple of years ago with a pool that rivaled any hotel pool for $1500 for 5 days or so. And we didn't even have to invest a couple hundred grand. But wait, that's not the only fee. There is also a 1% asset management fee. It was unclear to me whether that was assessed on your equity (so $2,175 more) or on the entire value of the properties (if so, multiply that by 3 or 4.) Oh, and the managers will keep 20% of the appreciation (but don't expect them to eat 20% of the losses.)
Yet another downside is the returns on this “investment.” I asked for the company to provide some past returns. They did not provide any, probably because they don't actually have any to provide. This investment is their second fund, but the first one doesn't liquidate until 2021, so as near as I can tell, this company has never gone full circle on a real estate investment. While past returns are no indication of future returns, some kind of past return seems worth seeing prior to investing, no? They do give some rather hilarious projected returns, however. They compare taking $2.1M and using it to either buy a second home (seriously, a $2.1M second home,) paying for luxury vacation rentals each year ($52,500) and investing the rest in stocks, or investing $395K in the fund, and $1.7M in the stock market. Then they show how their investment comes out on top with a 5.4% return AFTER paying for all your fancy vacations. Seriously, $52K a year on “luxury vacations.” Maybe there is someone out there who can afford this stuff, but those people probably don't need much of a return on their money. At any rate, who projects returns for their investment by combining them with another investment? And did I mention that they are assuming the appreciation on these properties will be equal to the return of the stock market?
Like most syndicated real estate deals, there is very limited liquidity. You are allowed to sell after 12 months, but you have to find a buyer yourself (good luck finding someone with $217,500 sitting around who makes as bad of investment decisions as you do).
I don't want to bash on this investment too much. For all I know, the properties really will appreciate at 7.5% and you'll get your 5% returns after taking 40 really expensive vacations. But I thought this was a particularly clear example of the classic “Doctor Deal” purchased by those without much financial savvy who are more interested in prestige than returns. Experienced real estate investors know that the return they can count on is the income from the property, not the appreciation, and especially not at rates like 7.5% a year. Yet this sort of investment has no income. In fact, the income is NEGATIVE since you are basically paying it each year. When a person with money meets a person with experience, the person with the experience gets the money and the person with the money gets the experience.
What do you think? Do you own a timeshare? Have you owned a “luxury residency fund” like this one? How has it turned out for you? What's the most bizarre “Doctor Deal” you have been pitched? Comment below!
I’m a Fund 1 Investor and it’s anticipated that investors will loose 40% of their original investment.
They say that many of the properties were purchased before the real estate bubble bursted I’m 2008/9
Wow. 40% and that’s after an awfully good decade for real estate. You would think that would have healed any wounds from 2008.
Losing 40% instead of the large gains promised is pretty bad. Who’s estimating this? Is Equity Estates honest with folks about the current outlook? I wonder what the estimated return is for the people who work for EE and started the funds.
Would love an update from EE fund investorsin 2024….if i am reading correctly two funds should have turned. Fund 1 was equity lost….how about fund 2? They are hitting targeted social medial ads hard for the current fund capital raise.
Hello D: did Fund 1 end up winding down at a 40 pct loss? I’m assuming the loss can be used to off set capital gains on other assets given the long holding period?
Yes it did
Equity Residencies
First time posting! I am a long-time WCI listener and I’m so excited to run across this post on this financial site. I got to this post while searching for a second home/investment property/vacation solution. Thank you Jim! You’ve taught me so much over the years.
I work as a surgeon and I love my vacations. However, I’m a staunch low-cost, mutual fund investor and appreciate value. So, from a psyche standpoint it hard for me to splurge on vacation, even if I have budgeted for it. Over the years, we’ve stayed in some less than optimal places 🙁
I’ve thought about buying a second or investment home that I would use sometimes and rent sometimes. I would have to find a place I like, where the numbers make sense and be willing to put in the work. But, it’s not the work that scares me, it’s the potential liability. I am thinking that an equity fund would reduce the liability burden but still allow me to travel and earn equity on a “second home” real estate investment.
This post is mostly about Equity Estates (EE). EE equates to about $2000 per vacation night which, I agree, is much too expensive for me (I can’t speak for other docs) so it’s off the table. On the other hand, Equity Residencies (ER) has a lower buy-in and offsets its monthly costs by opening up the homes that aren’t co-owner-occupied to the general public. I’m okay with sharing! It equates to spending about $1000 per night of vacation travel. (See sherpareport.com)
Don’t get me wrong, Equity Residencies is still a high buy in around 170,000. But, it’s for 3-4 weeks if travel annually. Realistically, I could commit to travel with the family 2 weeks per year. So, if any like-minded vacationers would consider splitting 1 share with me, please contact me and we can run the numbers. [email protected]
I’m not a business grad, I’m a doctor. So I’m going to throw out a numbers and the MBA’s can correct me so I don’t do dumb things with my money. (Assuming due diligence is complete and it’s not a Ponzi scheme) Initial investment is $170,000. Annual out of pocket expenses are a reasonable $2988, plus cleaning fees and airplane travel.
The bonus of the full share is that I get to take my family to a nice property 3-4 times a year for 10 years. We like to go to the beach and we like to ski. ER properties check both boxes.
I usually spend maybe $3000 on accommodations for the week. But, ER accommodation would be a step up. So, let’s say I would have had to spend $5000 -1000 for something equivalent. The houses are larger, 3-4 bedrooms. We could even bring my au pair, friends or invite grandparents!
Back to the numbers. That’s roughly $30,000 worth of luxury vacation accommodations per year x 10 years. Without ER, after 10 years, I would have spent $300,000 out of pocket on lodging for equivalent travel. Already, I my doctor mind, I’ve broken even or better. But, when the fund closes, ER return my principal to me, maybe some equity too. Let’s say it was a really bad real estate decade and I only get 50% of my principle back (similar to the expected EE return above). I would be out 85,000 but I think I would still be happy with my vacations :). Let say it’s a normal real estate decade and real estate went up by 4% per year. By my calculations (the fund is 90% invested and returns 80% of equity) I would be returned $235536, for my 170,000 investment. That’s about 3% return per year plus 30-40 trips. Sure, I could do better investing elsewhere but I would have the benefits of the experience of vacations in this equity fund. With this, as with any buy-in, it would be worth it if you use it a lot. It’s a little too much travel for me and my family alone, a half share option would be perfect.
I would love to know what EE actually returns and if its only 40%, why? Buy high, sell low, too much overhead?
You’re comparing 4-6 bedroom multi-million-dollar houses to a hotel room? I’m not endorsing EE, but there’s the flaw in your logic.
Interesting to find this thread that started in 2016. The power of the Internet.
I have read through all of the posts and appreciate the in-depth analysis by poster “JS.” Unfortunately, there is not a lot publicly known (ie web-based) about Equity Estates (EE) although I am meeting with them by phone tomorrow. I have looked at their business model a couple of times (pre-Covid and now) and have weighed their offering against our own travel experiences via hotels/VRBO/Airbnb, cruises, timeshares (ugh!) and other luxury residence clubs. EE has a unique business model that will not fit most vacationers, investors, doctors or MBA’s. I don’t think even EE would argue about just how narrow their client niche is.
If there are any current or previous Equity Estates investors/customers still reading this thread in October 2024, I would appreciate any e-mail exchange you would be willing to have. Maybe there is a way for WCI users here to connect without posting our email addresses in the forum itself.
Thanks for reading!
It’s fun to see a comment on this post pop up every year or two. I’d love for someone who bought in years ago to provide updates about how it all worked out from time to time.
I joined Fund 1 and when all properties were sold off, investors received approximately two thirds of their original investment back
No breakdown of property sales and distribution of funds were provided
EE Investor,
Would you have invested in a subsequent EE fund if you had not lost money on Fund 1?
Even though you did not get a breakdown of the property sales and distribution of funds, how well did EE handle the transaction? Did they give an explanation of why they lost money on Fund 1, and maybe things they would have done differently?
I guess that kind of confirmed my initial impression of what was likely to happen. Frankly, I run into people all the time who want to buy a second home to use but also rent out as an investment. I find that it’s usually not that great of an investment and I suppose this is a similar situation.
I do not think it is completely fair to judge Equity Estates based solely on the results of their Fund 1. Their second fund properties will not be sold until 2026 which will be another data point.
Fund 1 sold at a loss but I would not automatically extrapolate that across the other five active funds. I believe there are still investors from Fund 1 that rolled over their remaining investment into Fund 6. I lost money on one income property but that did not stop me from having another income property that will not lose money.
Equity Estates unfairly gets lumped in with timeshares which is a horrible comparison.
I had a good call this morning with EE and plan to have another one next week to dig into the financials aspects further. So far, I have only found their representatives to be open and transparent. Luxury travel structured as a fractional ownership is not for everyone but neither are timeshares, cruises, second homes, Airbnb stays, etc.
I think if people are buying it as a consumption item, fine. The problem I always had was it being marketed as an investment. Hopefully funds 2-6 do better, but so far the record isn’t awesome. Not even a 0% return. There is an alternative out there of just renting luxurious places or buying a second home.
I now “fractionally own” a luxurious vacation, but I don’t expect to make a profit on it.
Yes, if the track record of Fund 1 is enough to assess this then it fails miserably as an investment.
However, I think EE is unique in the potential to get all of your initial investment back and get upside to cover the annual fees. It is not a stretch to model a return that covers all of the monies paid to EE over the 10 year period. I think “JS” did just that in his post from early in this thread.
I am not aware of any other travel product that provides the potential to return all of one’s initial investment plus the ongoing annual expense to use the properties. About the closest you could come on the upside would be a second home in an attractive location where property values climb consistently over the same period. And your rents might cover the ongoing monthly costs.
EE’s potential upside return carries a great deal of risk. If Fund 1 is the payback standard then, yes, this is an awful way to spend money. And if you knew the end result in advance, your vacation in a luxury property would be pretty miserable.
There might not be a travel product that does that, but you could combine an investment and a travel product and do it. Here’s an example:
Put $250,000 into a solid index mutual fund or real estate investment.
Take $20K a year out and spend it on travel.
You’ll likely end up with an investment worth more than $250,000 in 10 or 15 years and have enjoyed a whole bunch of sweet trips in the mean time.
This is like combining insurance and investing. Two things that just shouldn’t be combined. Keep them separate and you’ll be a lot better off. I’m not saying don’t go on vacation. I’m just saying that combining your vacations and your investments may not work out very well.